Chapter #06 Challenge Questions Question #31 Part A Years Post Tax Cash flows Tax Pre Tax

Cash flows Pre Tax IRR Post Tax IRR Effective Tax Rate

0 -12600 -1400 -14000 33% 27% 20%

1 -1630 -1434 -3064

2 2381 828 3209

3 6205 3550 9755

4 10685 5778 16463

5 10136 3902 14038

Part B If tax depreciation schedule incorporate less deprecation over time as happen in the case of accelerated deprecation method than it will decrease the effective tax rate. Moreover, As the inflation increases the effective tax rate increases. Part C In my opinion in the case where nvestment is treated as expense for tax purposes. The effective tax rate will be equal to the implied Government Tax rate.

Question # 32 Part A Real Rate Inflation Rate Nominal rate is given by: Nominal rate 2 year annuity factor 3 year annuity factor For Pv of $21, the 2 yr nominal annuity is:

6% 5% 11.30% 1.705726 2.43102 12.31148

For Pv of $28.37, the 3 yr 11.67 nominal annuity is: The above calculations are not the real estimates because the rental cost is not include in it. Part B Real Rate Inflation Rate Nominal rate is given by:

6% 25%

Nominal rate 2 year annuity factor 3 year annuity factor For Pv of $21, the 2 yr nominal annuity is: For Pv of $28.37, the 3 yr nominal annuity is:

32.50% 1.324315 1.7542 15.85726

16.17262

The above calculation shows that inflation signifcantly impact the annual costs depending upon the length of the time they are operating, this is the reason why the book told us to calculate annual costs on the basis of real terms rather than nominal.

6 6110 1586 7696

7 3444 0 3444

Chapter #07 Challenge Questions